August was tough for me.
Same boat. I had a very difficult August expiration
I mostly do bull put spreads (spreads
thanks to your sage advice) and I’ve been guessing wrong on the bottom
recently. That’s why I’m looking at condors. It would be calming to
have a strategy that over a year’s time frame can be expected to produce a
profit: 20% annually would be great.
No guarantees, nor am I suggesting it’s a cinch to achieve, but
that’s a fairly conservative goal for IC traders.
Please check my math here—for 10 point
wings, a $0.50 gain from the premium for 90 days gets me to the 20% level,
ignoring compounding and commissions: $.50/10*4. = 20%. (From your
blog, I know this is way too little premium, and I concur. But it gives
me a reference point.)
As to your math, it’s good, but can be
refined. You divided the maximum gain ($0.50) by the spread width – which is
also the basic margin requirement for the iron condor. But that requirement is reduced by the cash collected
and thus, the VAR (value at risk, or your maximum loss is really $9.50). In addition, 90 days is not quite ¼ of a
Thus, a better equation is $0.50/$9.50 *
365/90 = 21.34%.
Better yet, is to reduce your maximum
profit by your commissions.
So your real
life example on the thread of about $3.00 initial credit with a plan to
close with $1.95 debit make this look like a strategy to learn.
(Math check $1.05/10*6 = 60%, I
think you are only going out 60 days or so.)
But refined: $1.05/$8.95 *
365/t (where t= # of days position is
held). I discussed going out 30 days and
holding for about half that time. Thus t
= approximately 15. In that case, ROI =
285%. You must understand that returns
this high do not come without very
Yes, this method has its merits. But right now I’m still leaning towards
managing the iron condor on a daily basis, rather than face a mandatory close
once the target profit is achieved. This method has one super advantage: You make your money
much sooner and that allows you to be completely out of the market for 2-3
weeks – or about 50% of the time. Think of how much risk that
eliminates! How do you quantify that?
BUT – if you are systemically forced to close for a loss this
(or any) month (if you established a maximum gain by planning to close early,
there MUST be a maximum loss that’s not too much larger than the maximum gain) how
would you feel about taking that loss and then doing nothing for the next
couple of weeks before it’s time to establish new iron condors for the next
expiration? For most traders, that’s
difficult, if not impossible. There’s
always that urge to get
That's where this methodology may fail – too many may be unable
or unwilling to take the loss under these conditions. I have no trouble taking losses using my
current methods (manage position without
an automatic closing price), but when that happens I always have other
positions that can make some money.
Sitting idle may not be very easy.
A disciplined trader has
no problem with this part because he/she knows to enter new positions only when conditions are right – not
when you feel the need to recover from a losing trade. That's the problem as I see it. This
method requires more discipline than 'regular' iron condor trading. If
you are a disciplined trader, then this method is worth learning. You may decide that it’s appropriate for a
portion (or even all) of your iron condor trading. But, with such discipline required, it’s not
I’m undecided whether to adopt this
method, and plan to test drive in small quantities.
One other question is whether going out
farther on the short calls and puts, i.e., more than 1 standard deviation would
Yes, but it's a
trade-off. Do you prefer the faster time decay and more risky negative
gamma offered by front-month options?
Or are you more comfortable trading further OTM options with better
gamma, but slower time decay? It's your comfort zone. Neither is 'better'
than the other. But, if it's easier for you to manage risk with one type
than the other, choose that one.
When trading iron
condors, earning profits is a cinch. There are plenty of profits.
IT'S THE LOSS SIDE THAT'S THE KILLER. WITHOUT GOOD DISCIPLINE, THE TRADER
IS DOOMED (IMHO), and that’s especially true in this high risk/high reward
method for trading iron condors.
P.S. Thanks for your thoughts on “point
of maximum acceptable loss.”